Market Analysis

Following last week’s U.S. jobs report, equities rallied despite rising rates and postponed rate cuts, observed JPMorgan, highlighting a growing disconnect in the equity markets.

According to the Labor Department’s latest report, the U.S. unemployment rate rose to 4.0% for the first time since January 2022, with nonfarm payrolls increasing by 272,000 jobs, suggesting the Federal Reserve might delay interest rate cuts.

JPMorgan analysts noted reduced expectations for rate cuts this year, now forecasting the first cut in November. Despite numerous risks—such as political instability in emerging markets, geopolitical tensions, concentrated market sectors, speculative trading in meme stocks and cryptocurrencies, persistent inflation and high rates, and signals pointing to potential economic slowdowns or recessions—equities continue to trade near record highs. Investor sentiment and positioning remain elevated.

In response, JPMorgan has adopted a defensive stance in its model portfolio, underweighting equities while overweighting commodities and cash. It has also adjusted its stance on euro area versus U.S. bonds, anticipating delayed European Central Bank easing due to ongoing inflation pressures and strong economic data.

Regarding specific equity markets, JPMorgan favors domestically-focused markets over internationally-exposed ones, particularly ahead of the U.K. general election. They highlight the FTSE 250’s historical performance post-Bank of England easing and its favorable position amid strong domestic economic activity. The U.K. equity market is noted for its affordability, low beta characteristics, exposure to China, and high dividend yield compared to other major developed markets.

Looking elsewhere, JPMorgan anticipates further gains in Chinese equities supported by improved housing data in June and July, alongside stabilizing macroeconomic indicators. In Japan, equities have lagged behind Europe and the U.S. due to a weak yen, but prospects for corporate reforms offer medium-term optimism. The bank expects yen weakness to taper off as the Fed cuts rates and the BOJ adjusts policies, projecting stronger performance for Japanese equities in the second half of 2024 driven by corporate earnings and reforms.

Paraphrasing text from "Investing" all rights reserved by the original author.